Lawmakers Finish Work on $330B in Tax Cuts

MARY DALRYMPLE

Published 8:00 pm, Wednesday, May 21, 2003

AP Tax Writer

About 25 million families will get rebates of up to $400 for each child this summer and most workers can expect paychecks about 4 percent fatter the rest of the year under a package of new tax cuts that Republicans in Congress will send President Bush.

A House vote in the early hours Friday was to be followed by action in the Senate later in the day, meeting Bush's demand that Congress pass before Memorial Day what will be the third-largest tax cut in history.

The package combines $330 billion in tax cuts and $20 billion in state aid, and it pushes more than 60 percent of that money into the economy over the next 15 months. Republicans championed the plan as good medicine for an ailing economy.

Democrats said this tax cut, the third in three years of the president's tenure, will eventually threaten fundamental government programs. Thomas "has no problem in creating the deficit for tax cuts, but his problem is when we are spending it for education, housing, Social Security and Medicare and prescription drugs, that is where he draws the line," said Rep. Charles Rangel of New York, the top Democrat on the Ways and Means Committee.

Even though its $330 billion in tax cuts through the next decade is less than a Senate bill that Bush dismissed last month as "little bitty," Bush praised the package. "The more money people have in their pockets, the more likely there is somebody that's going to be able to find work in America," he said.

Most workers would see bigger paychecks beginning in July, and many parents would get an advance refund worth $400 for each child late this summer. Bush said he would sign it after votes are completed Friday by the House and Senate.

The last sticking point was how to distribute $10 billion in new Medicaid assistance. The money is half the $20 billion in new aid going to fiscally strapped state and local governments over the next two years, bringing the total cost of the package to $350 billion, the maximum that moderate Senate Republicans would allow.

"Sometimes I get everything I want, sometimes I don't," Bush told lawmakers at a private meeting at the Capitol, according to White House spokesman Ari Fleischer.

The president originally sought $726 billion in tax cuts, an amount that a majority in the Senate said was too expensive when the government is expecting to run up a deficit of at least $300 billion, and possibly $400 billion, this year.

"The conference agreement has more stimulative impact than either the president's original proposal or the original House or Senate bill," said Fleischer. In the final years of the bill's 10-year life, "the president is getting less than he would have liked. He recognizes that. He wishes it could be more. But he is pleased nevertheless."

Democrats, who were largely shut out of negotiations over the bill, said its biggest impact will be to put the government deeper into debt. "They've done a triple back flip off the high board, and they've created a belly flop that all of us are going to feel," said Senate Minority Leader Tom Daschle, D-S.D.

Most taxpayers with income from investments will see a tax cut. The legislation lowers taxes on capital gains and stock dividends to 15 percent, 5 percent for low-income taxpayers through 2008. Investors currently pay as much as 38.6 percent tax on dividends and 20 percent on capital gains.

More than half the $330 billion tax cut will go to working individuals, married couples and families. Workers will see more money in their paychecks after July 1 as companies reduce the amount of tax withheld to reflect reduced income tax rates.

The rate cut will reach back to Jan. 1, and employers will reduce withholdings by enough to also cover the first half of the year. Those workers will also see their paychecks get a little leaner next year when companies readjust their withholding tables. The maximum income tax rate falls from 38.6 percent to 35 percent, and other rates drop from 35 percent to 32 percent, from 30 percent to 28 percent and from 27 percent to 25 percent. Those rate cuts were to have occurred in 2006 under the tax bill Congress passed two years ago.

Many of the other provisions aimed at individuals will expire in 2005, a device that permits lawmakers to fit the tax cuts into a limited budget. Until then, many married couples will see their "marriage penalty" disappear, parents can claim a $1,000 child tax credit and more taxpayers can avoid paying the alternative minimum tax.

Sen. John Breaux, D-La., called it a "roller coaster tax bill." "Taxes go down, then taxes go back up. …. It really makes you dizzy," he said.

Analysts at the Center Budget and Policy Priorities said that if extended through the coming decade, the legislation would cost $810 billion.

Small businesses looking to expand their operations, and entrepreneurs starting a new business, can recoup some of their purchases immediately under provisions aimed at encouraging new investments. Small businesses can expense up to $100,000 until 2005, instead of the $25,000 now allowed, and other companies can write off half their investments this year. Some Republicans expressed hope that this will not be the last tax bill of the year.

"We could have done more," said House Majority Leader Tom DeLay, R-Texas, noting that the budget allowed for up to $1.3 trillion in tax cuts this year. "I think this is an excellent first start," he said.